INTERSTATE HOTELS & RESORTS INC - 10-K Annual Report

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period for which the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). o

The aggregate market value of common stock held by non-affiliates of the registrant was $53,516,559, (based on the closing sale price of $4.70 on June 30, 2003 as reported by the New York Stock Exchange Composite Tape). For this computation, the registrant has excluded the market value of all shares of its common stock reported as beneficially owned by executive officers and directors of the registrant; such exclusion shall not be deemed to constitute an admission that such person is an “affiliate” of the registrant. The number of shares of Common Stock outstanding at March 5, 2004 was .

Portions of the registrant’s definitive Proxy Statement relating to the Registrant’s 2004 Annual Meeting of Shareholders are incorporated by reference into Items 10, 11, 12, 13 and 14.

Overview — We are the largest independent U.S. hotel management company not affiliated with a hotel brand, measured by number of rooms under management. In our hotel management business, we generate revenues from fees we receive for managing a portfolio of upscale, full-service and premium select-service hospitality properties. We own one hotel property and hold non-controlling joint venture equity interests in 29 of our managed properties. We also generate revenue from providing ancillary services in the hotel, resort, conference center and golf markets. The ancillary services we provide include insurance and risk management services, purchasing and project management services, information technology and telecommunications services and centralized accounting services. Through our BridgeStreet corporate housing division, we also generate revenues from the leasing of corporate long-term stay apartments.

As of December 31, 2003, we managed 295 properties, with 65,250 rooms in 41 states, the District of Columbia, Canada, Russia and Portugal. As of December 31, 2003, we had 2,884 apartments under lease or management through our BridgeStreet corporate housing division in the United States, Canada, France and the United Kingdom.

Our portfolio of managed properties is diversified by brand, franchise and ownership. We manage hotels with more than 30 franchise and brand affiliations and operate more than 30 independent hotels. We operate hotels for more than 60 different ownership groups, including individual investors, institutional investors, and investment funds, such as Oak Hill Capital Partners, L.P., CNL Properties, Inc., Cornerstone Real Estate and W.P. Carey, and public real estate investment trusts, such as MeriStar Hospitality Corporation (“MeriStar Hospitality”), Equity Inns, Inc., FelCor Lodging Trust Incorporated (“FelCor”), and Host Marriott Corporation.

We were formed on August 3, 1998, as MeriStar Hotels and Resorts, Inc., (“MeriStar”) when we were spun off by CapStar Hotel Company and became the lessee and manager of all of CapStar’s hotels. Immediately after the spin-off, American General Hospitality Corporation, (a Maryland corporation operating as a real estate investment trust, or “REIT”) and CapStar Hotel Company merged to form MeriStar Hospitality. We then acquired the management business of the manager of American General’s hotels. On May 31, 2000, we completed the acquisition of BridgeStreet Accommodations, Inc. to create our BridgeStreet corporate housing division. On January 1, 2001, in connection with the implementation of new REIT tax laws which permit subsidiaries of a REIT to lease the real estate it owns, we assigned the leases on each of these properties to taxable subsidiaries of MeriStar Hospitality and entered into management contracts with those taxable subsidiaries for each of the hotels owned by MeriStar Hospitality.

On July 31, 2002, we merged with Interstate Hotels Corporation (“Interstate”) to create Interstate Hotels & Resorts, Inc. The transaction was a stock-for-stock merger of Interstate into us in which Interstate stockholders received 4.6 shares of common stock for each equivalent share of Interstate stock outstanding. Holders of MeriStar common stock continued to hold their stock following the merger. Immediately after the merger, we effected a one-for-five reverse split of our common stock. The merger was accounted for as a reverse acquisition, with Interstate as the accounting acquiror, and MeriStar as the surviving company for legal purposes. Because of the increase in scale of our management business following the merger, we began the process of separating our senior management team from that of MeriStar Hospitality. On October 22, 2003, Steven D. Jorns, then Vice Chairman and Chief Investment Officer, replaced Paul Whetsell as our Chief Executive Officer and resigned from the board of directors of MeriStar Hospitality. Mr. Whetsell remains as our Chairman and continues as the Chairman and Chief Executive Officer of MeriStar Hospitality.

Hotel Management — We manage hospitality properties for a diverse group of owners. The owners of our managed properties include several large, publicly-owned hotel companies, such as MeriStar Hospitality, Host Marriott Corporation, FelCor Lodging Trust, and Equity Inns, large institutional real estate investment companies, such as CNL Hospitality, Cornerstone Real Estate, and W. P. Carey, as well as other owners of

individual or multiple hotel properties. The hotels we manage are primarily located throughout the United States and Canada, including most major metropolitan areas and rapidly growing secondary cities. We also currently manage three hotels in Moscow, Russia, and the Praia D’El Rey Marriott Golf & Beach Resort in Praia del Rey, Portugal. Our managed hotels include hotels operated under nationally recognized brand names such as Hilton, Marriott, Sheraton, Westin, Radisson, Doubletree, Embassy Suites, and Holiday Inn.

We manage properties primarily within the upscale, full-service and premium select-service sectors, and provide related management services for owners of both sectors as well. We believe the combination of these two sectors provides us with a balanced mix of managed assets. The two sectors attract a wide variety of potential customers, including both business executives and upscale leisure travelers. Managing in these two sectors allows us to provide systems and services to owners on a broad scale, capitalizing on the extensive experience of our corporate operations, sales and support personnel.

Corporate Housing — Through our Corporate Housing division we provide high quality, fully furnished accommodations under our BridgeStreet brand. We lease substantially all of our Corporate Housing accommodations through flexible, short-term leasing arrangements. We strive to match our supply of accommodations with current and anticipated client demand in order to reduce our financial exposure under leases. We believe our flexible leasing strategy allows us to react to changes in market demand for particular geographic locations and types of accommodations. Our management strives to develop strong relationships with property managers to ensure that we have a reliable supply of high quality, conveniently located accommodations. In London and Toronto, we lease some units with terms of two or more years if we believe it is necessary to acquire a critical number of apartments in a section of the city with high demand for corporate housing and low supply of apartment units.

Operating Approach — Our senior hotel management team has successfully managed hotels in all sectors of the lodging industry. We attribute our management success to our ability to analyze each hotel as a unique property and to identify specific opportunities for cash flow growth present at each hotel. Our principal operating objective is to intensively manage the execution of our strategic business plan for each property in order to generate higher revenue per available room and increase net operating income, while providing our hotel guests with high-quality service and value. Given the challenging operating environment that has resulted from a sluggish economy, coupled with the disruptions caused by the risk of terrorist activity and worldwide geopolitical difficulties, we believe our depth of experience and strategies are now even more valuable to the owners of the hotels we manage. Similarly, our senior corporate housing executives have extensive experience in that line of business. We believe their experience in developing and executing successful business strategies are crucial to the future expansion and success of our operations in this business segment.

We operate primarily in two segments: Hotel Management and Corporate Housing. We operate our Corporate Housing division under the trade name BridgeStreet Corporate Housing Worldwide. Each segment is managed separately because of its distinctive products and services and is a reportable operating segment. We evaluate the performance of each segment based on adjusted earnings before interest, taxes, depreciation and amortization or “Adjusted EBITDA.” See Note 5 to “Selected Financial and Other Data,” below.

In our Hotel Management business segment, we generate earnings through base fees, incentive fees and other services from our existing management contracts, as well as additional management contracts. We intend to work aggressively with the owners of our managed properties to increase relative performance of their hotels and reduce or control costs in the current difficult economic and operating environment. Our Hotel Management business segment has four divisions: Branded Full-Service hotels, Independent hotels, International hotels and Select-Service hotels (operating under the Crossroads Hospitality name).

In our Corporate Housing business segment, we plan to improve earnings by improving our inventory management and cost control in our existing markets, increasing our focus on high growth markets such as New York, Washington, DC and Chicago and increasing our sales effort in our primary National segments. We may reduce our inventory in areas in which demand is weak or declining. We may also add additional

markets in North America if the conditions are favorable. In our European markets we plan to manage shifting demand in London. In addition, we are continuing to expand our Licensed Global Partner Program, in which we license the BridgeStreet name to various local corporate housing providers throughout the United States.

We intend to increase the number of our investments in hotels and resorts through the creation of joint ventures and/or real estate funds where we will invest alongside other real estate investors. These investment vehicles will allow us to increase our return on invested capital by providing potential returns from both the management fees and underlying real estate. Our target is to invest from 5-30% of the common equity in each joint venture, averaging 20-25%. We believe our willingness to provide substantial equity participation will further align our economic interest with that of our financial partners in each hotel property and will create a substantial number of additional joint venture opportunities. We will seek to acquire interests in upscale, full-service hotels, conference centers and resorts where we believe an opportunity exists to increase value through our operating expertise, market recovery and repositioning. We may also seek select whole-ownership acquisitions which we will then market to joint venture partners. The joint venture that we invest in will typically carry debt of 60-65% of project cost.

Our hotel management division’s principal operating objectives are to generate higher revenue per available room, control costs and increase the net operating income of the hotels we manage, while providing our guests with high-quality service and value. We believe that skilled management is the most critical element in maximizing revenue and cash flow in properties, especially in upscale, full-service properties.

Personnel at our Corporate Office carry out financing and investment activities and provide services to support and monitor our on-site hotel operating executives. Each of our executive departments, including Hotel Operations, Sales and Marketing, Human Resources, Food and Beverage, Technical Services, Information Technology, Development, Legal, and Corporate Finance, is headed by an executive with significant experience in that area. These departments support the hotel operating executives by providing on-line real-time financial reporting and review, accounting and budgeting services, sales and revenue management, cost controls, property management tools and other resources that we can create, maintain and deliver efficiently and effectively using our centralized Corporate Office resources.


•	Comprehensive Budgeting and Monitoring — Our operating strategy begins with an integrated budget planning process. The budget is implemented by individual on-site managers and monitored by our Corporate Office. Our Corporate Office personnel work with the property-based managers to set targets for cost and revenue categories at each of the properties. These targets are based on historical operating performance, planned renovations, planned targeted marketing, operational efficiencies and local market conditions. Through effective and timely use of our comprehensive on-line real-time financial information and reporting systems, we are able to monitor actual performance efficiently on a daily basis. As a result, we can rapidly adjust prices, staffing levels and sales efforts to take advantage of changes in the market and to maximize revenue yield.

•	Targeted Sales and Marketing — We employ a systematic approach toward identifying and targeting demand segments for each property in order to maximize market penetration. Executives at our Corporate Office and our property-based managers divide these segments into smaller subsegments and develop tailored marketing plans to drive market penetration in each such segment. We support each property’s local sales efforts with Corporate Office sales executives who develop and implement new marketing programs, and monitor and respond to specific market needs and preferences. We employ revenue yield management systems to manage each property’s use of the various distribution channels in the lodging


	industry. Those channels include franchisor reservation systems and toll-free numbers, websites, travel agent and airline global distribution systems, corporate travel offices and office managers and convention and visitor bureaus. Our controlled access to these channels enables us to maximize revenue yields on a day-to-day basis. We recruit sales teams locally and their incentive-based compensation is based on revenue produced.

•	Strategic Capital Improvements — We and the owners of our properties plan renovations primarily to enhance a property’s appeal to targeted market segments. This is designed to attract new customers and generate increased revenue and cash flow. For example, in many of our properties, the banquet and meeting spaces have been renovated, and guest rooms have been upgraded with high speed internet access and comfortable work spaces to better accommodate the needs of business travelers so we can increase average daily rates. We base recommendations on capital spending decisions on both strategic needs and potential rate of return on a given capital investment. While we provide recommendations and supervision of many capital improvement projects, the owners of the properties are responsible for funding capital expenditures.

•	Strategic Use of Brand Names — We believe the selection of an appropriate franchise brand is essential in positioning a hotel property optimally within its local market. We select brands based on local market factors such as local presence of the franchisor, brand recognition, target demographics and efficiencies offered by franchisors. We believe our relationships with major hotel franchisors place us in a favorable position when dealing with those franchisors and allow us to assist our clients in negotiating favorable franchise agreements with franchisors. We believe our ability to acquire additional management contracts will further strengthen our relationship with franchisors.


	The following chart summarizes information on the national franchise affiliations of our properties as of December 31, 2003:


•	Emphasis on Food and Beverage — We believe popular food and beverage concepts are a critical component in the overall success of a full-service hospitality property. We utilize food and beverage operations to create local awareness of our hotel facilities, to improve the profitability of our hotel operations, and to enhance customer satisfaction. We are committed to competing for patrons with restaurants and catering establishments by offering high-quality restaurants that garner positive reviews and strong local and/or national reputations. We have developed several proprietary restaurant concepts. We have also successfully placed national food franchises such as Pizza Hut®, Starbuck’s Coffee® and “TCBY”® in several of our hotels. We believe popular food concepts will strengthen our ability to attract business travelers and group meetings and improve the name recognition of our properties.

•	Commitment to Service and Value — We are dedicated to providing consistent, exceptional service and value to our customers. We conduct extensive employee training programs to ensure high-quality, personalized service. We have created and implemented programs to ensure the effectiveness and uniformity of our employee training. Our practice of tracking customer comments through guest comment cards, and the direct solicitation of guest opinions regarding specific items, allows us to target investment in services and amenities. Our focus on these areas has enabled us to attract lucrative group business.

•	Purchasing — We have invested extensive resources to create efficient purchasing programs that offer the owner of each of the hotels we manage quality products at very competitive pricing. These programs are available to all of the properties we manage. While participation in our purchasing programs is voluntary, we believe they provide each of our managed hotels with a distinct competitive and economic edge. In developing these programs, we seek to obtain the best pricing available for the quality of item or service being sourced, in order to minimize the operating expenses of the properties we manage.

•	Business Intelligence — We employ real-time internet-based reporting systems at each of our properties and at our Corporate Office to monitor the daily financial and operating performance of each of the properties. We have integrated information technology services through networks at many of the properties. Corporate Office executives utilize information systems that track each property’s daily occupancy, average daily rates, and revenue from rooms, food and beverage. By having current property operating information available on a timely basis, we are better able to respond quickly and efficiently to changes in the market of each property.


	The following table provides information relating to our real estate investments.

We have notes receivable outstanding to certain of our managed hotels totaling $8.6 million at December 31, 2003. We also have outstanding commitments to fund additional investments or loans to certain properties, if requested, totaling $3.2 million at December 31, 2003.

We plan to expand our portfolio of hotels, resorts and conference centers by securing additional full-service and select-service management contracts. In addition, we attempt to identify properties that are promising acquisition candidates located in markets with economic, demographic and supply dynamics favorable to hotel owners. Through our due diligence process, we seek to select those expansion targets where we believe selected capital improvements and focused management will increase the property’s ability to attract key demand segments, demonstrate better financial performance, and increase long-term value. In order to evaluate the relative merits of each investment opportunity, senior management and individual operations teams create detailed plans covering all areas of renovation and operation. These plans serve as the basis for our expansion decisions and guide subsequent renovation and operating plans.

We seek to invest in properties that meet the following market and hotel criteria:


	Economic Growth. We focus on metropolitan areas that are approaching, or have already entered, periods of economic growth. Such areas generally show above average growth in the business community as measured by job formation rates, population growth rates, tourism and convention activity, airport traffic volume, local commercial real estate occupancy, and retail sales volume. Markets that exhibit these characteristics typically have strong demand for hotel facilities and services.

	Supply Constraints. We seek lodging markets with favorable supply dynamics for property owners. These dynamics include an absence of current new hotel development and barriers to future development such as zoning constraints, the need to undergo lengthy local development approval processes, and a limited number of suitable sites. Other factors limiting the supply of new hotels are the current lack of financing available for new development and the inability to generate adequate returns on investment to justify new development.

	Geographic Diversification. Our properties are located in 41 states across the United States, the District of Columbia, Canada, Russia and Portugal. We seek to maintain a geographically diverse portfolio of properties to offset the effects of regional economic cycles.

Location and Market Appeal. We seek to invest in hotels situated near both business and leisure centers that generate a broad base of demand for hotel accommodations and facilities. These demand generators include airports, convention centers, business parks, shopping centers and other retail areas, sports arenas and stadiums, major highways, tourist destinations, major universities and cultural and entertainment centers with nightlife and restaurants. The confluence of nearby business and leisure centers enables us to attract both weekday business travelers and weekend leisure guests. Attracting a balanced mix of business,


	group and leisure guests to the hotels helps to maintain stable occupancy rates and high average daily rates.

	Size and Facilities. We seek to invest in additional full-service hotels with 200 to 500 or more guest rooms, which include accommodations and facilities that are, or can be made, attractive to key demand segments such as business, group and leisure travelers. These facilities typically include upscale guest rooms; food and beverage facilities; extensive meeting and banquet space; and amenities such as health clubs and swimming pools.

	Potential Performance Improvements. We target under performing hotels where intensive management and selective capital improvements can increase revenue and cash flow. These hotels represent opportunities where our systematic management approach and targeted renovations should result in improved property performance.

We expect that our relationships throughout the industry will continue to provide us with a competitive advantage in identifying, evaluating and investing in hotels that meet our criteria. We have a record of successfully managing the renovation and repositioning of hotels in situations with varying levels of service, room rates and market types. We plan to continue to manage such renovation and repositioning programs as we invest in and/or acquire new management contracts of hotels, resorts and conference centers.

On May 31, 2000, we completed the acquisition of BridgeStreet Accommodations, Inc. BridgeStreet is a leading provider of corporate housing services in metropolitan markets located in the United States, Canada, the United Kingdom and Paris, France. On August 17, 2001, we expanded BridgeStreet into France through the acquisition of a Paris-based corporate housing company. As of December 31, 2003, our BridgeStreet corporate housing division had 2,884 apartments under direct leases and 360 corporate housing units rented through other network partners. Additionally, through the growth of our Licensed Global Partner Program, we have added more than 3,000 units to our distribution channel, with 15 partners signed as of December 31, 2003. Total fees and commissions for this licensing program in 2003 were over $0.2 million. In addition, referrals from our licensed partners produced approximately $1.0 million in additional revenues for us.

Accommodations — Through our BridgeStreet brand, we offer high quality, fully furnished one-, two- and three-bedroom accommodations. These accommodations, together with the specialized service we offer, are intended to provide guests with a “home away from home.” We select our BridgeStreet apartments based on location, general property condition and basic amenities, with the goal of providing accommodations that meet each guest’s particular needs. As a flexible accommodation services provider, we can satisfy client requests for accommodations in a variety of locations and neighborhoods, including requests for proximity to an office, school or area attraction, as well as requests for accommodations of specific types and sizes. The substantial majority of BridgeStreet’s accommodations is located within a quality property complex and includes dedicated parking and access to fitness facilities, including, in many cases, pools, saunas and tennis courts. We also are able to customize accommodations to a guest’s request with items such as office furniture, fax machines and computers.

In the US, we lease substantially all of our Corporate Housing accommodations through flexible, short-term leasing arrangements. We strive to match our supply of accommodations with client demand, in order to reduce our financial exposure under the leases. We believe our flexible leasing strategy allows us to react to changes in market demand for particular geographic locations and types of accommodations. Our Corporate Housing management strives to develop strong relationships with property managers to ensure that we have a reliable supply of high quality, conveniently located accommodations.

In London and Toronto, market conditions often dictate that BridgeStreet take a higher risk in attaining quality furnished accommodations through the leasing of apartments and condominiums for terms of excess of 2 years. We believe that this is necessary in order to have the required number of apartments in these cities

and to adequately service our exiting and evolving client base. The adverse consequences of this risk were best demonstrated by the performance of our Toronto market in 2003, which was very negatively impacted by the SARS epidemic and subsequent economic slide, resulting in more than $1.5 million in net losses as we were unable to terminate many of these long-term leases in the face of a continued declining revenue stream.

Our Corporate Housing accommodations generally are priced competitively with all-suite or upscale extended-stay hotel rooms, even though we believe our accommodations offer more to our guests than those hotel rooms. We believe we generally are able to price our accommodations competitively due to our:


•	High quality accommodations.

•	Favored relationships with local apartment communities which translate into better negotiated rental rates.

•	Ability to lease accommodations in accordance with demand and leave unfavorable markets quickly.

•	Ability to leverage our size to allow for better negotiated rates on furniture and housewares, which translate into lower direct costs.

•	Relatively lower operating cost structure through the synergistic use of technology and our best practices initiative known as BridgeStreet Basics.

The length of a guest’s stay can range from a week, to a few months to a year, with the typical stay ranging from 30 to 45 days.

Corporate Client Services — Our goal is to provide valuable, cost-effective housing to our corporate clients. Many of these clients’ human resource directors, relocation managers or training directors have significant, national employee lodging requirements. In particular, BridgeStreet aims to relieve our clients of the logistics and administrative burden often associated with relocating employees and/or providing them with quality, cost-effective housing for extended, but temporary assignments.

Guest Services — We strive to provide the highest quality of customer service by overseeing all aspects of a guest’s lodging experience, from preparations prior to the guest’s arrival to the moving out process. BridgeStreet maintains a representative in each city in which it operates to be responsive to guests’ needs. BridgeStreet’s guest services department offers customers comprehensive information services before and during their stays to help guests acclimate themselves to their new surroundings.

Sales and Marketing — Our Corporate Housing division focuses primarily on business-to-business selling. At the headquarters level, we focus on global accounts. These are large national companies that we believe can most benefit from our expanding national and international network. At the local level, each of BridgeStreet’s operating subsidiaries has corporate account specialists that call on local companies, including local branches of regional or national companies, to solicit business. Each account specialist focuses their efforts on the key decision makers at each company responsible for establishing and administering travel and accommodation policies. These decision makers are typically human resource directors, relocation managers or training directors. By aggressively pursuing relationships with potential clients and expanding services to existing clients, BridgeStreet seeks to become each client’s primary or sole provider of flexible accommodation services nationwide. We operate a global BridgeStreet sales force to market our worldwide capabilities to our international corporate clients. In addition, we have expanded BridgeStreet’s Internet presence to supplement traditional marketing strategies and to better serve our customers.

We tailor our marketing strategy to the needs of particular clients. For example, we may market ourselves to a corporation with relocating employees by focusing on our ability to situate families in two and three bedroom apartments, or provide access to accommodations in both metropolitan and suburban settings, or access to accommodations that allow pets. In contrast, when marketing to potential corporate clients in need of short-term housing, we might emphasize our flexible lease terms and our ability to customize an accommodation with amenities such as office equipment, including computers, additional telephone lines and other work-related items.

We intend to continue an advertising and promotional program designed to enhance the BridgeStreet name in the flexible accommodation services industry and broaden our client base. In addition, we promote our BridgeStreet brand name by advertising in trade publications, business publications, Chamber of Commerce listings, local visitor magazines, telephone directories and the Internet, and through periodic direct mail and e-brochure campaigns.

Local Market Share — We have offices in 17 US markets as of December 31, 2003. We train all of our BridgeStreet sales employees in our sales and marketing techniques. With a better-trained sales force and our management experience, we believe we will be in a better position to penetrate local markets and increase our market share.

Global Accounts — We believe global accounts have substantial growth potential for BridgeStreet. BridgeStreet’s current customers include a significant number of large multi-national companies who utilize BridgeStreet’s services, such as Motorola, Accenture, Lehman Brothers and Credit Suisse First Boston. We plan to maximize sales to those existing corporate clients and to obtain new clients. We use a national sales and marketing program that promotes the BridgeStreet brand and highlights BridgeStreet’s national and international network, as well as BridgeStreet’s ability to serve as a central point of contact on all housing issues. Many of BridgeStreet’s clients are Fortune 2000 companies with significant national and international employee lodging requirements.

Franchise Program — In 2002, BridgeStreet launched a licensing program designed to extend BridgeStreet’s established network partner properties and offer operating systems and new revenue opportunities to licensees. The licensing program is intended to expand BridgeStreet’s national and international presence to a globally branded enterprise capable of generating and maintaining fee streams from licensing and related value-added marketing and operational programs. Called the Licensed Global Partner Program, it provides regional corporate housing providers with access to BridgeStreet’s global customers, a centralized reservation system and sales and marketing support. These services will be offered to licensees who meet BridgeStreet’s stringent operational, financial and product quality standards. We view it as an opportunity for global expansion and to generate additional enterprise brand value. At December 31, 2003, we had 15 franchisees.

Network Partner Relationships — We have developed a network partner relationship with flexible accommodation service providers in the United States and in 40 countries worldwide. Through network partner agreements, BridgeStreet has expanded the number of locations where it can serve our clients’ needs. In some additional markets, BridgeStreet intends to enter into network partner agreements with one or more leading local or regional flexible accommodation service providers having the size and quality of operations suitable for serving BridgeStreet’s client base.

Three of our hotels are located in Moscow, Russia. Our net management fees earned from these hotels for the year ended December 31, 2003 were $4.3 million, or 6.6 % of total management fees, and $4.1 million, or 10.3% of total management fees for the year ended December 31, 2002. The management fees are paid in U.S. dollars.

In connection with the management contracts for the three hotels located in Russia, we agreed to fund loans to the hotel owners. The loans outstanding to these owners at December 31, 2003 amounted to $0.2 million.

In addition, we manage the Praia D’El Rey Marriott Golf & Beach Resort in Praia del Rey, Portugal, which was recently developed, and opened on December 15, 2003. We have a loan outstanding to this owner at December 31, 2003, in the amount of $0.5 million.

We and our subsidiary, Northridge Insurance Company, offer our managed hotels reinsurance and risk management services. We purchase insurance from major insurance carriers at attractive rates due to large

volume purchasing and excellent claims history. Northridge reinsures a portion of the coverage from these third-party primary insurers. We provide the owners of the managed hotels the opportunity to participate in the policy at prices and coverages that we believe are more advantageous than third-party hotel owners could otherwise obtain. In conjunction with our risk management services and in order to minimize our insurance claims, we set policies regarding the standards of operation for participating managed hotels.

We offer this insurance coverage to our managed hotels under the terms of each individual management agreement. The policies provide for layers of coverage with minimum deductibles and annual aggregate limits. The policies are for coverage relating to innkeepers’ losses (general/comprehensive liability), wrongful employment practices, garagekeeper’s legal liability, replacement cost automobile losses and real and personal property insurance. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Business Overview — Insurance and Risk Management.”

We manage all of the properties owned by MeriStar Hospitality, a REIT. At December 31, 2003, MeriStar Hospitality owned 93 properties. Our relationship with MeriStar Hospitality is governed in part by an intercompany agreement. Historically, we have had close operating, management and governance relationships with MeriStar Hospitality. We manage all of their hotel properties under long-term management contracts and have, in the past, shared several key management personnel and board members with MeriStar Hospitality. Due to the merger between MeriStar and Interstate and our resulting increased scale, we and MeriStar Hospitality have split the management teams of the two companies, although Paul W. Whetsell continues as the Chairman of both companies and is the Chief Executive Officer of MeriStar Hospitality. In addition, our board and MeriStar Hospitality’s board have each formed special committees to explore further changes to the relationship between the two companies, including possible changes to or termination of the intercompany agreement and certain changes to the management contracts.

Intercompany Agreement — We are a party to an intercompany agreement with MeriStar Hospitality. Because of the provisions of the intercompany agreement, we are restricted in certain aspects of the nature of our business and the opportunities we may pursue. Under the agreement, we ar


Delaware		52-2101815
(State of Incorporation)		(IRS Employer Identification No.)


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PART I
Item 1.	Business		2
Item 2.	Properties		30
Item 3.	Legal Proceedings		30
Item 4.	Submission of Matters to a Vote of Security Holders		31
PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters		31
Item 6.	Selected Financial Data		31
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		35
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		54
Item 8.	Financial Statements and Supplementary Data		55
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		87
Item 9A.	Controls and Procedures		87
PART III
Item 10.	Directors and Executive Officers of the Registrant		87
Item 11.	Executive Compensation		87
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		88
Item 13.	Certain Relationships and Related Transactions		88
Item 14.	Principal Accounting Fees and Services		88
PART IV
Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K		88
Signatures			92


	Guest				% of
Franchise	Rooms		Hotels		Rooms

Hilton®		8,243		31		12.6	%
Sheraton®		6,785		22		10.4	%
Independent		6,430		31		9.9	%
Marriott®		5,659		17		8.7	%
Hampton Inn®		5,499		43		8.4	%
Holiday Inn®		4,331		20		6.6	%
Radisson®		3,938		13		6.0	%
Westin®		3,069		7		4.7	%
Courtyard by Marriott®		2,703		15		4.1	%
Residence Inn®		2,297		16		3.5	%
Crowne Plaza®		1,848		6		2.8	%
Doubletree®		1,832		7		2.8	%
Embassy Suites®		1,489		6		2.3	%
Doral®		1,156		4		1.8	%
Holiday Inn Select®		1,116		4		1.7	%
Renaissance®		1,072		2		1.6	%
Wyndham®		1,069		4		1.6	%
Fairfield Inn®		931		5		1.4	%
Comfort Inn®		849		6		1.3	%
Homewood Suites®		822		5		1.3	%
Holiday Inn Express®		637		5		1.0	%
Hilton Garden Inn®		603		4		0.9	%
Amerisuites®		557		4		0.9	%
Ramada®		465		3		0.7	%
Best Western®		373		5		0.6	%
Country Inn and Suites®		314		2		0.5	%


	Guest				% of
Franchise	Rooms		Hotels		Rooms

Omni®		215		1		0.3	%
Quality Suites®		177		1		0.3	%
Quality Inn®		165		1		0.3	%
La Quinta Inn and Suites®		148		1		0.2	%
Travel Lodge®		131		1		0.2	%
Comfort Suites®		119		1		0.2	%
Staybridge Suites®		108		1		0.2	%
Howard Johnson®		100 65,250		1 295		0.2	% 100.0%
Total


	Number		IHR Equity
Name	of Rooms		Participation

Pittsburgh Airport Residence Inn by Marriott		156		100	%
FCH/ IHC Hotels, L.P.
Courtyard Atlanta		211		49.5	%
Courtyard Houston Galleria		209
Fairfield Inn Atlanta		242
Fairfield Inn Dallas		204
Fairfield Inn Houston 1-10		160
Fairfield Inn Houston Galleria		107
Fairfield Inn Scottsdale		218
Hampton Inn Houston 1-10		90
MeriStar Investment Partners, L.P.
Wyndham Milwaukee		220		10.0	%
Sheraton Iowa City		234
Sheraton Anchorage		375
Radisson Scottsdale		318
Radisson San Diego		260
Marriott Trumbull		323
Hilton Newark, CA		313
Hilton Minneapolis/ St. Paul		300
Embassy Suites Walnut Creek		249
Embassy Suites Philadelphia Airport		263
CNL IHC Partners, L.P.
Courtyard Hartford/ Manchester		90		15.0	%
Hampton Inn Houston Galleria		176
Residence Inn Hartford/ Manchester		96
Northridge-Interstate Hospitality Partners, LLC
Sheraton Smithtown		209		10.0	%
Interconn Ponte Vedra, L.P.
Marriott at Sawgrass		508		10.0	%
MRI Houston Hospitality, L.P.
Residence Inn Houston Astrodome Medical Center		287		25.0	%
CapStar Hallmark Company LLC.
Radisson St. Louis Riverfront		454		50.0	%
San Diego Bridgeworks, LLC
Hilton San Diego Gaslamp		282		17.24	%
Orchard Park Associates, L.P.
Comfort Suites Norwich		116		5.0	%


ITEM 1.	BUSINESS


•	Real Estate Investments